Penalties: Ten Key Points from the New Regime

Matthew Hutton MA, CTA (fellow), AIIT, TEP highlights 10 important points concerning penalties for late tax returns and the late payment of tax.

Context

Finance Act 2009 includes a new penalty regime for the late filing of tax returns, and a new system of penalties for the late payment of tax (see MTR 4/09 Item 10.1 and 5/09 Item 10.5). This One Minute Guide features 10 practical tax issues for practitioners to consider (statutory references are to FA 2009, unless otherwise stated)

1.  Penalties for Late Returns

The revised penalty regime relates to various tax returns, including for Income Tax, Corporation Tax, PAYE, the Construction Industry Scheme (ClS), SDLT and IHT (s106 Sch 55).  The regime will be introduced from a date to be specified by Treasury Order.

2.  Penalty Amounts

The initial penalty for a late return is a fixed £100 if the return remains outstanding more than 3 months after the filing date, HMRC may issue a notice imposing a penalty of £10 for each day the failure continues, for a period of up 90 days, commencing from a date specified in the notice.

If the delay continues more than 6 months after the filing date, the penalty charge is the greater of 5% of the tax liability which would have been shown in the return, or £300. If the return is still outstanding 12 months after the filing date, the additional penalty charge is also the greater of 5% of the tax liability or £300. However, if the taxpayer fails to make the return in order to withhold information which would enable or assist HMRC to assess the tax liability, the penalty is the greater of 100% of the tax liability and £300 if the taxpayer’s actions are deliberate and concealed, or the greater of 70% of the tax liability and £300 if those actions are deliberate but not concealed (although see 3 below).  A modified system of penalties applies to late CIS returns (Sch 55 paras 7-13).

3.  Penalty Reductions

The maximum 100% and 70% penalties mentioned above may be reduced if the taxpayer discloses ‘relevant information'(as defined), which was withheld by failing to make a return. The 100% penalty may be reduced to a minimum of 30% if the disclosure was unprompted, or 50% if the disclosure was prompted. The 70% penalty may be reduced to a minimum of 20% or 35%, depending on whether the disclosure was unprompted or prompted. In all cases, the penalty cannot be reduced below £300. HMRC may reduce any penalty including the above minimum penalties, if HMRC think it right because of ‘special circumstances' (Sch 55, paras 14-16).

4.  Interaction with Other Penalties 

Any tax-geared penalties imposed may be reduced by other penalties if they are charged by reference to the same tax liability such as late payment surcharges or penalties for incorrect returns, but not in respect of other penalties for late returns, or penalties for the late payment of tax. If more than one tax geared penalty is charged for a late return, the aggregate penalty must not exceed 100% of the relevant tax liability

5.  Penalty Assessments and Appeals

HMRC must assess and notify late filing penalties. Any late filing penalty must be paid no later than 30 days from the date on which the penalty notice is issued. Taxpayers have the right of appeal against both the imposition of a penalty by HMRC, and the amount of the penalty.

No penalties arise if the taxpayer satisfies HMRC (or the Tribunal, on appeal) that there is a reasonable excuse for failing to file the return. Certain excuses are not considered to be reasonable, including reliance on another person unless the taxpayer took reasonable care to avoid the failure

6.  Penalties for Failure to Pay On Time

The late payment penalty regime applies to various taxes and duties, including Income Tax, Corporation Tax, PAYE, the Construction Industry Scheme (ClS), SDLT and IHT.  As with late filing penalties, the late payment regime will be introduced from a date to be specified by Treasury Order (s 107, Sch 56).

The legislation includes a table showing the taxes to which the penalty provisions apply, and the dates after which a penalty will be incurred (Sch 56 para 1(4)).

7.  Penalty Amounts

Separate rules apply to penalties for failure to pay ‘occasional amounts' and amounts in respect of periods of 6 months or more, and for failure to pay PAYE and CIS liabilities. Penalties in the former category are incurred if tax remains unpaid after the table date, which is normally 30 days after the due date. The penalty is 5% of the unpaid tax.

If tax remains unpaid 5 months after the ‘penalty date' (i.e., normally 6 months after the due date), the taxpayer is liable to an additional penalty of 5% of the tax remaining unpaid. An additional penalty of 5% is imposed in respect of tax remaining unpaid 11 months after the penalty date (or 12 months after the due date, as appropriate) (Sch 56 para 3).

8.  PAYE and CIS

Separate rules apply in most cases to PAYE and CIS tax liabilities (Sch 56 para 5). Taxpayers are liable to penalties in amounts based on the number of payment ‘defaults', i.e., failures to pay the tax in full by the due date in respect of the same tax during the tax year. The first such failure during the tax year does not count as a default. Subsequent defaults are penalised as follows:

If the tax is more than six months late, the penalty is 5% of the unpaid tax. An additional 5% penalty is charged if the tax is more than 12 months late. HMRC may reduce penalties in special circumstances (Sch 56 paras 5-9).

9.  Suspended Penalties

If the taxpayer requests a ‘time-to-pay' (i.e., ‘deferral') arrangement and HMRC agrees, no penalties arise between the date of the request and the end of the deferral period.  However, if the taxpayer breaks the arrangement, HMRC may serve a penalty notice to reinstate the liability originally removed (Sch 56 para 10). Similar provisions apply to suspend certain surcharges and penalties (s108), including Income Tax and CGT surcharges under TMA 1970 s59C).

10.  Assessments, Appeals etc

Penalties for late payment must be assessed by HMRC and notified to the taxpayer, and must be paid within 30 days from the day on which the penalty notice is issued.  However, the taxpayer has the right of appeal against both the imposition and amount of the penalty.

This information is a broad summary of the new rules, and is for general guidance only. Specific professional advice should be sought as appropriate.

(Busy Practitioner July/August 2009, edited by Julian Harris and published by Bloomsbury Professional)

What is MTR?

MTR is a 90 minute monthly training course, held in London, Ipswich and Norwich – as well as a reference work. Each Issue records the most significant tax developments over a wide range of subjects (see below) during the previous month, containing 30 to 40 items. The aim is not necessarily to take the place of the journals, but rather to provide an easily digestible summary of them and, through the six-monthly Indexes, to build up, over the years, a useful reference work. 

The first aim, therefore, of MTR is to inform. The second and subsidiary aim is to provide a monthly forum for the discussion of issues that tend to come up in professional practice, largely, though not exclusively, prompted by specific items in MTR.

Who should come to MTR? Does it attract CPD?

MTR is designed not primarily for the person who spends 100% of his/her time on tax, but rather for the practitioner (whether private client or company/commercial) for whom tax issues form part of his/her practice. Attendance at MTR qualifies for 1.5 CPD hours for members of the Law Society, for 1.5 CPD points for accountants (if MTR is considered relevant to the delegate’s practice) and (subject to the individual’s self-certification) should also count towards training requirements for the CIOT. For STEP purposes, MTR qualifies for CPD in principle, on the grounds that at least 50% of the content is trust and estate related.  
 
What is the content of MTR?

The material is drawn from HMRC press releases, Tax Bulletins, VAT business briefs, case reports and articles in the professional press. Each item carries a reference as to source which can be followed up if necessary. 

The logic of the ordering of the 12 sections is as follows: first, Capital Taxation (viz 1. Capital Gains Tax, 2. Inheritance Tax and 3. Stamp Taxes). Second, Personal Tax (4. Personal Income Tax). Third, Business Related Matters (viz, 5. Business Tax, 6. Employment, 7. National Insurance and 8. VAT & Customs Duties). And fourth, Miscellaneous (viz 9. Compliance, 10. Administration, 11. European and International and 12. Residue). An annual binder is provided within the subscription cost.

Despite an inevitable element of selectivity, MTR aims to be catholic in its coverage – and this is reflected in the presentations where appropriate: there may well be NI, VAT or employment tax points of which the person advising mainly on estate planning (for example) should at least be aware. That said, the London sessions at least tend to focus, by majority request, on estate planning issues: it is possible that in future one of the sessions might be geared more to company/commercial matters. 

How is MTR circulated?

The Notes are emailed to each delegate in the week before the presentations (and thus can easily be circulated around the office), with a follow-up four or five pages of practical Points Arising during the various sessions (whether in London, Ipswich or Norwich).

When and where is MTR held?

The London meetings take place at the National Liberal Club, One Whitehall Place, London SW1, on either the first or second Tuesday of the month, generally in the David Lloyd George Room. There is a choice of four sessions: 9.00 - 10.30 (3 places available), 11.00 – 12.30 (6 places available), 1.00 – 2.30 (8 places available) and 4.00 – 5.30 (3 places available).

The Ipswich meetings take place generally on the first or second Wednesday of the month at the offices of Pretty’s solicitors 45 Elm Street, Ipswich 5.00 – 6.30pm (5 places available). 

The Norwich meetings take place at the Norfolk Club, Upper King Street, Norwich on the first or second Thursday of the month from 5.30 – 7.00pm (3 places available). 

Dates are fixed up to a year in advance and any one delegate from a firm can take up the firm’s place each month. Attendance is limited to no more than 30 delegates in London and 25 delegates in Ipswich and Norwich (to make for ease of round table discussion).  The cost in London is £60 plus VAT, and in Ipswich and Norwich £50 plus VAT (billed every six months in advance).

How do I find out more?

For further details, visit http://www.matthewhutton.co.uk/ on Conferences & Seminars and then Monthly Tax Review – or email Matthew on This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

For those whose firms unable to make the monthly seminars but wishing to order MTR as 'Notes Only' (at £180 per annum for the 12 issues, invoiced six-monthly in advance), visit  our sister site, TaxBookShop.com:
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Article Added Sunday, 13 December 2009

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